Negotiating with vendors can save you money, as well as help you avoid hassles.
Here are 12 tips on how to negotiate with vendors.
1. Understand Supplier and Vendor Contract Terminology
When negotiating with suppliers and vendors, you stand at a disadvantage if you don’t know the terms of your contract. So, let’s start with some key terminology.
The terms supplier and vendor are often used interchangeably. However, a technical distinction is sometimes drawn between suppliers, who purchase goods or services to sell to other sellers further down the supply chain, and vendors, who sell directly to consumers or businesses.
Suppliers sell in large quantities to resellers, while vendors sell in smaller quantities to end users. Where a seller stands in the supply chain can affect their pricing, so knowing whether you’re dealing with a supplier or a vendor can help you estimate what you should expect to pay.
Invoice Payment Terms
Another important set of terms to know involves terms of payment. The language of your contract defines when payments are due to your vendor. Common invoice payment terms include:
- Cash in advance (payment in advance): You pay in full before you receive goods
- Cash with order: This is a type of cash-in-advance arrangement where you pay upfront even before you place an order, which amounts to you being required to make a cash deposit
- Cash before shipment: This is a cash-in-advance arrangement where you pay after you place an order and before goods are shipped
- Cash on delivery (net due upon receipt of goods): You pay when you receive the goods, which can be returned if you don’t pay
- Net 30 (N30): Your vendor extends you credit where you agree to pay within 30 of days after receipt of goods or after receipt of an invoice; common variations on this arrangement include N7, N10, N60 and N90
- 1/10 Net 30: This is a discount option where you can get a 1% discount if you pay within 10 days instead of waiting 30 days. A variation on this would be 2/10 Net 30, which is a 20% discount for paying within 10 days
These are some of the most important terms to know when negotiating vendor contracts. Negotiating a contract often involves requesting a credit arrangement with a longer term or better discount.
2. Use Cash-Flow Projections to Plan Budgets and Payment Schedules
To determine what type of payment terms you should try to negotiate with your vendor, it helps to know what you can afford to pay and when you can afford to pay it. The best way to determine this is to do good cash-flow projections.
Your cash-flow statement compares how much cash you have coming into your business over a given period compared with what you have going out. It takes into account cash generated or spent through operations (such as sales revenue or payroll expenses), investments (such as asset purchases) or financing (such as loans).
By projecting your cash flow for upcoming months, quarters and years, you can forecast how much you’ll have available to spend on vendors each month and when you’ll be able to make payments. This will help you understand what time of invoice payment terms would be most advantageous to you.
3. Compare Multiple Vendors
When approaching vendors to negotiate, you’ll be in a stronger bargaining position if you’ve researched their competition. This allows you to compare prices, terms and reviews, giving you more leverage to ask for a competitive arrangement.
You can research vendors by using resources such as:
- Vendor websites
- Referrals from industry peers
- Online reviews
- Supplier databases, such as Thomasnet.com
- Product and service comparison sites, such as G2 for software vendors
Use these types of resources to create a preliminary list of vendors to research in more depth.
4. Screen Suppliers Carefully
As you’re comparing vendors, develop a checklist of categories you’ll use to evaluate options. Your checklist should list criteria that are priorities for you, such as:
- Invoice payment terms
- Location and shipping speed
- Customer support
You can find some of the information you need online. But for a full evaluation, you’ll need to contact vendors directly. You can tell a lot about a vendor from the way they respond to your communication. For instance, if vendors take an inordinately long time to return phone calls or email, this might be a sign they have poor customer support.
5. Request Quotes
An important step in screening a prospective new vendor is requesting a quote. Asking for a quote invites them to make your supplier offer naming prices and terms, providing a foundation for future discussion.
In the process of requesting a quote, you will gain an opportunity to ask vendors more detailed questions about their terms and pricing. Getting a quote also helps you compare vendors and gives you leverage to request a more competitive offer.
6. Ask About Incentives
Whether you’re negotiating an offer with a new vendor or writing a letter to a supplier to change payment terms, an effective strategy for requesting a favorable arrangement is to ask about incentives.
For example, you can ask if a vendor offers discounts to loyal customers who order in volume or over a long-term basis. A similar strategy for how to negotiate price with a supplier via email is to ask if they offer discounts for customers who pay early.
If you’re reselling a vendor’s product to your customers, another incentive you can request is a discount for helping advertise your vendor’s products, known as an advertising allowance. With this arrangement, the vendor pays you an advertising fee, which gets subtracted from what you owe them.
7. Minimize Vendor Risk
Vendors will be more inclined to offer you favorable terms if you can persuade them that they aren’t placing themselves at excessive risk of financial loss. One way to do this is by maintaining a good business credit score. You can build your business credit rating by taking steps such as maintaining a good personal credit score, paying vendors on time and monitoring your credit score so you can correct inaccuracies and detect fraud.
You also can reduce vendor risk by offering concrete assurances of your goodwill in the form of a vendor financing arrangement.
For example, offering a deposit can convince suppliers that you’re serious about being fiscally responsible with your account. Another strategy is offering some type of collateral, such as inventory or a percentage of future sales. You also can agree to pay interest in return for credit consideration. If your company is a corporation, you can offer vendors stock.
8. Negotiate Terms Besides Price
When bargaining with vendors, keep in mind that price isn’t the only item up for negotiation. Another important item to negotiate is invoice payment terms. For example, it might improve your cash flow significantly if you can persuade a vendor to extend you a net 60 or net 90 agreement. Other items you can consider negotiating include:
- Interest rates
- Contract length
- Minimum purchase requirement
- Shipping methods
- Order processing speed
- Cancellation clauses and penalties
Study your contact carefully to identify potential items for negotiation. Having an experienced lawyer go over your contract with you is advisable.
9. Test Samples Before Placing Bulk Orders
If you’re going to be ordering in bulk from a supplier, or if you’re requesting a custom-manufactured part with precise specifications, make sure you request a test sample before placing a volume order.
Communicate to your vendor exactly what you need and verify their understanding by requesting a sample product. This will save you time and money and prevent expensive misunderstandings with your vendor.
10. Get Agreements Clearly Stated in Writing
A clear written agreement forms a foundation for effective vendor relationships and negotiations. A written agreement provides transparency, helping ensure that both parties understand the terms of the arrangement. This makes it easier to identify specific points for negotiation and reach a mutually agreeable adjustment.
If you aren’t clear on any points in your contract, don’t hesitate to discuss it with your vendor. Make sure to retain a copy of any agreements you sign.
11. Pay on Time
The best way to maintain a strong position for negotiating with vendors is to pay on time consistently. A history of on-time payments provides proof that you’re a safe credit risk, which is one reason payment history plays a major role in credit scoring systems.
If you have a track record of paying your vendor on time, they are more likely to be open to extending you more favorable pricing and credit terms.
12. Give Late-Payment Notifications Early
While always paying on time is ideal, when you can’t avoid being late, giving your vendor as much advance notice as you can is the best policy. This allows them to make adjustments on their end so that they aren’t surprised at the last minute by a sudden reduction in cash flow they were expecting.
You can blunt the blow of a late payment by giving your vendor an estimate of when you expect to be able to catch up on your payments. Offering to pay interest or extending other incentives are other ways to reassure your supplier that you take timely payments seriously.
Use Vendor Negotiation Strategies to Secure Favorable Terms
Having a good vendor negotiation strategy can help you secure lower prices, win more favorable credit arrangements or avoid late payment disputes. To negotiate effectively with vendors, you need to do accurate financial planning and have a sound financing strategy.
If you’re struggling with your vendor arrangements because of cash-flow problems, improving your financing strategy may help you improve your relationships with your vendors.
Fast Capital 360 offers small business financing options such as accounts receivable financing and merchant cash advances to help you strengthen your cash flow. If you require financing, take a few minutes to fill out our no-obligation online application and find out which options you may pre-qualify for.